Property depreciation is a tax deduction available to property investors, allowing them to offset the natural wear and tear of an income-producing property against their taxable income. Depreciation can be claimed on both the building itself (capital works) and the plant and equipment assets within the property.
1. Capital works (also known as Division 43)
This refers to the deduction for the decline in value of the building's structure and any fixed items such as walls, doors, windows, and built-in cabinetry. Capital works deductions can be claimed on residential properties built after 17 July 1985 and commercial properties built after 20 July 1982. The deduction is generally claimed at a rate of 2.5% per year for 40 years.
2. Plant and equipment (also known as Division 40):
This category covers the depreciation of removable assets within the property, such as appliances, carpets, blinds, air conditioners, and hot water systems. The depreciation rates for these items vary based on their effective life as determined by the Australian Tax Office (ATO). For example, an oven may have an effective life of 12 years, while carpets may have an effective life of 10 years. The ATO provides a comprehensive list of assets and their effective lives.
To claim property depreciation in Australia, you generally need a tax depreciation schedule prepared by a qualified quantity surveyor. This schedule outlines the depreciation deductions you can claim for both capital works and plant and equipment over the property's effective life.
It's important to note that changes to legislation in 2017 affect the eligibility to claim depreciation for plant and equipment assets in second-hand residential properties. Investors who purchased a second-hand residential property after 9 May 2017 can only claim depreciation on plant and equipment assets if they were installed new by the investor. However, capital works deductions remain unaffected by these changes and can still be claimed.
Property depreciation can significantly reduce an investor's taxable income, increasing their after-tax cash flow. It's essential to consult a tax professional or a qualified quantity surveyor for specific advice on claiming depreciation for your investment property.
